German Deutschland Bond Planned by Majority of States

Germany's first common federal-state bond is drawing support as regional governments mull how to meet the euro's fiscal compact rules after their share of the nation’s 1.94 trillion euro ($2.6 trillion) debt rose to 30 percent this year. Photographer: Krisztian Bocsi/Bloomberg

June 13 (Bloomberg) -- As many as 11 of Germany’s 16 states
including Berlin and Saarland are lining up for a first joint
bond sale with the federal government, a Bloomberg poll of the
regional administrations shows.

States favorable to selling a common bond -- dubbed
Deutschland Bond -- see savings in a sale even after the
government balked at sharing liability, officials said. As the
regional administrations and the government plan next year’s
budgets, some cross-party support has emerged for the sale.

The Saarland, led by Chancellor Angela Merkel’s Christian
Democrats in coalition with the Social Democrats, expects
savings over stand-alone sales, Stienke Kalbfuss, the state’s
Finance Ministry spokeswoman, said in a telephone interview
yesterday. “It’s not a political question, we expect to save
money,” said Kalbfuss.

Germany’s first common federal-state bond is drawing
support as regional governments mull how to meet the euro’s
fiscal compact rules after their share of the nation’s 1.94
trillion euro ($2.6 trillion) debt rose to 30 percent this year.
Other states co-run by the Social Democrats, including Baden-Wuerttemberg and Lower Saxony, say they won’t join a bond sale
this year. Tighter euro-area fiscal rules oblige states to
balance budgets by 2020.

Hesse, the state that’s home to Frankfurt and is run by the
CDU with the Free Democrats, won’t decide whether to join the
bond until it gets final estimates on savings, state Finance
Minister Thomas Schaefer said in a June 7 telephone interview.

No Savings

Thuringia state, which is led by the CDU with the SPD as
junior partner, has 18 billion euros of debt and expects no
savings by joining the bond, Alexander Flachs, the state’s
Finance Ministry spokesman, said by phone yesterday.

Norbert Walter-Borjans, finance minister of Germany’s most
populous state, North-Rhine Westphalia, said in a May 24
interview that regional premiers had failed to persuade Finance
Minister Wolfgang Schaeuble to accept joint liability for the
bond. At the same time, states can make savings even if each is
responsible for its own share of the debt, he said.

State leaders say that Schaeuble last year initially
signaled the federal government would share full liability as
the price for gaining their approval for the bill to incorporate
the EU’s fiscal compact into German law. Schaeuble’s ministry
rejected full liability in a statement on June 25, 2012.

Biggest Debt

North-Rhine Westphalia owes a third or 180 billion euros of
the 16 states’ total debt of 586 billion euros and is rated AA-for its long-term obligations by Standard & Poor’s, compared
with the federal government’s AAA.

German constitutional law bars the government from allowing
a state to become bankrupt, implying that a degree of added
security is attached to the Deutschland Bond even if full
federal co-liability isn’t incorporated in the debt’s terms.

States like Walter-Borjans’ North Rhine-Westphalia are
counting on attracting international investors to the bond and
believe that its potential success will lead to repeated sales
to create a large liquid market. Past sales of so-called
“jumbo” bonds in which German states group together for ad hoc
debt sales have mainly targeted domestic investors and haven’t
generated a secondary market.

A Deutschland Bond may be sold as early as the third
quarter this year, according to the Finance Ministry in Berlin.